Articles By Topic
By Topic: Political Intelligence
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From Vol. 6 No.17 (Apr. 25, 2013)
GAO Report Dissects the Mechanics of the Political Intelligence Market and Highlights Insider Trading Risks for Hedge Fund Managers
Hedge fund managers and other sophisticated investors are increasingly seeking out political intelligence (as defined below) to inform their investment decision-making. While political intelligence can give hedge fund managers a trading edge, it also presents insider trading and other legal risks. See “Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012). To address such insider trading risks, Congress passed the Stop Trading on Congressional Knowledge Act (STOCK Act) in 2012 to clarify that insider trading laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, apply to information derived from members of Congress and their staffs. See “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012). The STOCK Act defines political intelligence to include information that is “derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress; and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions.” As part of the STOCK Act, Congress commissioned the United States Government Accountability Office (GAO) to study the role of political intelligence in investment decision-making and any attendant risks that could require the passage of additional legislation. The GAO recently published a report detailing its findings (Report). The Report discusses: (1) what is known about the sale of public and nonpublic political intelligence, including the extent to which investors rely on such information and the effect the sale of political intelligence may have on financial markets; and (2) potential benefits, costs and challenges associated with suggested legislation that would impose disclosure requirements on those who provide, gather, sell or use political intelligence. The Report offers hedge fund managers a richer understanding of the political intelligence market and the risks involved in using this type of information in their investment decision-making. This article summarizes key findings of the Report.
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From Vol. 5 No.40 (Oct. 18, 2012)
Sixth Annual Hedge Fund General Counsel Summit Highlights SEC Enforcement Priorities, Side Letters, Investment Allocations, Expense Allocations, Trade Errors, Record Retention, Fund Marketing, Secondaries, JOBS Act and STOCK Act (Part Two of Two)
On September 18 and 19, 2012, ALM Events hosted its Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City. Panelists, including regulators, in-house practitioners and law firm professionals, discussed topics of significant relevance for hedge fund general counsels, including: SEC enforcement priorities relating to hedge funds; the nuts and bolts of a successful hedge fund compliance program (including a discussion of side letters, investment allocations, expense allocations, trade errors and record retention); marketing of hedge funds (including a discussion of compensation of marketing professionals and the Jumpstart Our Business Startups (JOBS) Act); secondary market transactions in fund shares; and the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) and its implications for the gathering of political intelligence. See “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012). Our coverage of the GC Hedge Summit is provided in two installments. The first installment covered the sessions addressing the nuts and bolts of a successful compliance program, marketing of hedge funds and secondary market transactions in hedge fund shares. See “Sixth Annual Hedge Fund General Counsel Summit Highlights SEC Enforcement Priorities, Side Letters, Investment Allocations, Expense Allocations, Trade Errors, Record Retention, Fund Marketing, Secondaries, JOBS Act and STOCK Act (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012). This second article covers the session discussing the SEC’s enforcement priorities and the session discussing the implications of the STOCK Act for the gathering of political intelligence by hedge fund managers. In particular, this article includes a comprehensive summary of the keynote address by Bruce Karpati, Co-Chief of the Asset Management Unit of the SEC’s Division of Enforcement.
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From Vol. 5 No.39 (Oct. 11, 2012)
Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers
At an October 1, 2012 event co-sponsored by The National Law Journal; MoloLamken LLP; Wachtell, Lipton, Rosen & Katz; and Wilmer Cutler Pickering Hale & Dorr LLP, an illustrious panel of former federal prosecutors discussed the current state of insider trading enforcement and reviewed numerous hot-button issues of interest to hedge fund managers and other investors. This article summarizes the key insights from the panel discussion.
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From Vol. 5 No.14 (Apr. 5, 2012)
Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls
Every day officials in Washington make decisions that affect the prospects and profitability of individual companies and entire industries. Thus, it is not surprising that the use of political intelligence firms has become increasingly common among sophisticated investors such as hedge funds. Depending on the focus of the engagement, these firms can help hedge funds in a variety of areas, including conducting research and due diligence, developing an investment idea or strategy and informing trades in financial markets. For funds that need to follow legislative or regulatory developments closely, political intelligence consultants can serve as their eyes and ears in Washington. By leveraging their relationships with lawmakers and agency officials, these consultants can deliver real-time “inside the Beltway” information thereby providing a competitive advantage over those simply monitoring news and data services. On April 4, 2012, President Obama signed into law a bill that raises important issues for hedge funds that retain political intelligence firms. The bill is called the Stop Trading on Congressional Knowledge Act, commonly referred to as the STOCK Act. Although the primary purpose of the bill is to affirm that the insider trading laws apply to Members of Congress and other public officials, the legislation makes clear that hedge funds and their employees who trade on information obtained from a political intelligence firm can be exposed to potential liability. The STOCK Act has also drawn significant attention to political intelligence firms and those who retain their services. Given these developments, a heightened level of government scrutiny in this area is expected. Federal prosecutors and regulators will likely be focused on the type of information these firms obtain, how they obtain it, who they provide it to and how it is used. Thus, while political intelligence firms can deliver a valuable service that is entirely lawful, fund managers who employ these firms or who wish to do so should be aware of the possible associated risks. In a guest article, Justin V. Shur, a Partner at Molo Lamken LLP, considers those risks and offers four specific suggestions as to how to manage them.
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From Vol. 5 No.2 (Jan. 12, 2012)
STOCK Act Could Expand Insider Trading Laws to Prohibit Trading by Hedge Funds Based Upon Nonpublic “Political Intelligence”
Last month the Senate Homeland Security & Governmental Affairs Committee passed the “Stop Trading on Congressional Knowledge Act,” or “STOCK Act,” and the House Financial Services Committee held hearings on similar legislation. The primary purpose of this Act is to close a loophole in the law that may allow Members of Congress to legally trade securities based upon nonpublic “political intelligence.” However, hedge fund managers should watch this legislation closely as it could have significant, perhaps unintended, implications. Depending on what provisions (if any) are ultimately enacted, the legislation could alter the way fund managers conduct basic regulatory due diligence in connection with investments. The legislation could weaken a key provision of Regulation FD, which confirms the “mosaic theory” defense to federal insider trading charges, and impact the way fund managers use employees, expert networks, lobbyists and political intelligence firms to research federal legislative and political activities in connection with their investments. In fact, the legislation could fundamentally alter the way that fund managers interact with federal employees, including Members of Congress. In a guest article, Scott E. Gluck, Of Counsel at Venable LLP, discusses: the background of the STOCK Act; relevant insider trading law; specific provisions of the STOCK Act relevant to hedge fund managers; and seven distinct issues for hedge fund managers to monitor, including the potential impact of the STOCK Act on the “mosaic theory” defense to insider trading charges.
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